I recently had a very interesting chat on cryptocurrencies with Martin Gymer, CEO of Custodiex. Forgetting the hype and tales of untold riches made by teenagers, there has been a steadily growing interest in this world by our esteemed banks and financial institutions.
In conversation with Martin and scouring the daily press, I have to agree, that there is a lot of interest and we seem to have reached a point of inevitability. The full impact of crypto is in my opinion likely to be felt at an infrastructure and technological level rather than the ‘bitcoin’ in your pocket.
The Complete Game Changer
Those in capital markets have long been promised the nirvana of instantaneous settlement which is beyond T+0 and thereby removes all manner of risks in transactions. This is itself a benefit of vastly improved liquidity in markets of all shapes and sizes, not just financial ones. And if history teaches us anything, it's that jumps and shifts in the liquidity aspects of markets precede greater levels of interest and activity. See what Martin and I discussed here….
“The next stage is creating a T+0 instantaneous swap of two different assets. This would be the complete game-changer, it would eradicate credit as we know it.”
How Secure is The Storage of Digital Assets?
Aside from the trading aspect, the biggest concern in markets is how you store and look after the assets being traded to ensure ‘good delivery’. With assets that have no apparent physical form and only have some ethereal existence, the need to lock down and secure those assets is an absolute must for any institution wishing to enter this type of market. The notion of storing millions of pounds of value on not much more than a memory stick does not sit well in the compliance offices of banks! Enter then the notion of cold storage, which we blogged about recently. The Crypt in Crypto? Safe Storage and Treasury Management of Digital Assets
An analogy to cold storage is a safe deposit box where we securely place assets. The benefit is these assets are no longer co-mingled in some ‘omnibus’ account structure in which institutions have to ensure all rights and entitlements are appropriately persevered. Instead, they simply gain access to the customers ‘cold storage’ with permission and whatever is in there is owned by the customer, irrefutably. This is perhaps the biggest game changer when coupled with near real-time settlement.
“Our hardware is contained within steel safes, inside a 1-metre [thick] concrete structure, inside a faraday cage, inside a decommissioned nuclear bunker that is 3 metres thick and is secured by ex-SAS guards…….and on top of that, we have all the security around the digital storage. These are the most secure structures available in Europe.”
Have we then reached the tipping point? I think so. We will see large institutions embrace the technology and begin to deploy solutions for trusted customers. We will see the emergence of new derivatives such as Crypto NDFs. We will undoubtedly see the overlap of crypto technology into the world of physical assets, with technology empowering more financial engineering. We’ll also witness failures and volatility, which will make regulators take note, and ultimately we’ll see the technology and services mature to replace legacy infrastructure and technology.